10-Q 1 pepsicoq1-10xq3252017.htm FORM 10-Q Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 25, 2017 (12 weeks)
OR
 
    
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to             
Commission file number 1-1183
 peplogoa02a02a02a37.jpg
PepsiCo, Inc.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
 
North Carolina
  
13-1584302
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
 
 
700 Anderson Hill Road, Purchase, New York
  
10577
(Address of Principal Executive Offices)
  
(Zip Code)

914-253-2000
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x
  
Accelerated filer  ¨
  
Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
  
Smaller reporting company ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨    NO  x
Number of shares of Common Stock outstanding as of April 19, 2017 was 1,428,501,223.



PepsiCo, Inc. and Subsidiaries

Table of Contents
 
 
Page No.
Part I Financial Information
 
Item 1.
Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
Item 2.
Report of Independent Registered Public Accounting Firm
Item 3.
Item 4.
Part II Other Information
 
Item 1.
Item 1A.
Item 2.
Item 6.


2


PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements.

Condensed Consolidated Statement of Income
PepsiCo, Inc. and Subsidiaries
(in millions except per share amounts, unaudited) 
 
12 Weeks Ended
 
3/25/2017

 
3/19/2016

Net Revenue
$
12,049

 
$
11,862

Cost of sales
5,286

 
5,151

Gross profit
6,763

 
6,711

Selling, general and administrative expenses
4,817

 
5,078

Amortization of intangible assets
13

 
14

Operating Profit
1,933

 
1,619

Interest expense
(252
)
 
(246
)
Interest income and other
40

 
14

Income before income taxes
1,721

 
1,387

Provision for income taxes
392

 
442

Net income
1,329

 
945

Less: Net income attributable to noncontrolling interests
11

 
14

Net Income Attributable to PepsiCo
$
1,318

 
$
931

Net Income Attributable to PepsiCo per Common Share
 
 
 
Basic
$
0.92

 
$
0.64

Diluted
$
0.91

 
$
0.64

Weighted-average common shares outstanding
 
 
 
Basic
1,428

 
1,446

Diluted
1,440

 
1,459

Cash dividends declared per common share
$
0.7525

 
$
0.7025


See accompanying notes to the condensed consolidated financial statements.

3


Condensed Consolidated Statement of Comprehensive Income
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited) 
 
12 Weeks Ended 3/25/2017
 
Pre-tax amounts

Tax amounts

After-tax amounts
Net income


 


 
$
1,329

Other comprehensive income
 
 
 
 
 
Currency translation adjustment
$
512

 
$
4

 
516

Cash flow hedges:
 
 
 
 
 
Reclassification of net gains to net income
(33
)
 
11

 
(22
)
Net derivative losses
(3
)
 
(2
)
 
(5
)
Pension and retiree medical:
 
 
 
 
 
Reclassification of net losses to net income
28

 
(9
)
 
19

Remeasurement of net liabilities and translation
(14
)
 
4

 
(10
)
Unrealized gains on securities
9

 
(5
)
 
4

Total other comprehensive income
$
499

 
$
3

 
502

Comprehensive income
 
 
 
 
1,831

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(10
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
1,821

 
12 Weeks Ended 3/19/2016
 
Pre-tax amounts
 
Tax amounts
 
After-tax amounts
Net income
 
 
 
 
$
945

Other comprehensive loss
 
 
 
 
 
Currency translation adjustment
$
(220
)
 
$

 
(220
)
Cash flow hedges:
 
 
 
 
 
Reclassification of net gains to net income
(21
)
 
5

 
(16
)
Net derivative losses

 
(1
)
 
(1
)
Pension and retiree medical:
 
 
 
 
 
Reclassification of net losses to net income
37

 
(12
)
 
25

Remeasurement of net liabilities and translation
15

 
(48
)
 
(33
)
Unrealized losses on securities
(12
)
 
7

 
(5
)
Total other comprehensive loss
$
(201
)
 
$
(49
)
 
(250
)
Comprehensive income
 
 
 
 
695

Comprehensive income attributable to noncontrolling interests
 
 
 
 
(14
)
Comprehensive Income Attributable to PepsiCo
 
 
 
 
$
681


See accompanying notes to the condensed consolidated financial statements.

4


Condensed Consolidated Statement of Cash Flows
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
12 Weeks Ended
 
3/25/2017

 
3/19/2016

Operating Activities
 
 
 
Net income
$
1,329

 
$
945

Depreciation and amortization
477

 
481

Share-based compensation expense
72

 
69

Restructuring and impairment charges
27

 
30

Cash payments for restructuring charges
(7
)
 
(30
)
Charge related to the transaction with Tingyi (Cayman Islands) Holding Corp. (Tingyi)

 
373

Pension and retiree medical plan expenses
44

 
60

Pension and retiree medical plan contributions
(79
)
 
(93
)
Deferred income taxes and other tax charges and credits
129

 
19

Change in assets and liabilities:
 
 
 
Accounts and notes receivable
(128
)
 
(349
)
Inventories
(513
)
 
(530
)
Prepaid expenses and other current assets
(299
)
 
(255
)
Accounts payable and other current liabilities
(1,386
)
 
(661
)
Income taxes payable
172

 
318

Other, net
(37
)
 
(72
)
Net Cash (Used for)/Provided by Operating Activities
(199
)
 
305

 
 
 
 
Investing Activities
 
 
 
Capital spending
(317
)
 
(389
)
Sales of property, plant and equipment
12

 
25

Acquisitions and investments in noncontrolled affiliates
(36
)
 

Divestitures
41

 
55

Short-term investments, by original maturity:
 
 
 
More than three months - purchases
(3,436
)
 
(2,556
)
More than three months - maturities
3,866

 
1,446

More than three months - sales
138

 

Three months or less, net

 
7

Other investing, net
1

 

Net Cash Provided by/(Used for) Investing Activities
269

 
(1,412
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from issuances of long-term debt

 
2,532

Payments of long-term debt
(752
)
 
(1,251
)
Short-term borrowings, by original maturity:
 
 
 
More than three months - proceeds
28

 

More than three months - payments

 
(9
)
Three months or less, net
2,396

 
480

Cash dividends paid
(1,098
)
 
(1,038
)
Share repurchases - common
(444
)
 
(619
)
Share repurchases - preferred
(1
)
 
(2
)
Proceeds from exercises of stock options
245

 
165

Withholding tax payments on RSUs, PSUs and PEPunits converted
(116
)
 
(99
)
Other financing
(1
)
 
(2
)
Net Cash Provided by Financing Activities
257

 
157

Effect of exchange rate changes on cash and cash equivalents
43

 
(22
)
Net Increase/(Decrease) in Cash and Cash Equivalents
370

 
(972
)
Cash and Cash Equivalents, Beginning of Year
9,158

 
9,096

Cash and Cash Equivalents, End of Period
$
9,528

 
$
8,124


See accompanying notes to the condensed consolidated financial statements.

5


Condensed Consolidated Balance Sheet
PepsiCo, Inc. and Subsidiaries
(in millions except per share amounts)
 
(Unaudited)

 
 
 
3/25/2017

 
12/31/2016

ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
9,528

 
$
9,158

Short-term investments
6,461

 
6,967

Accounts and notes receivable, less allowance: 3/17 - $139 and 12/16 - $134
6,848

 
6,694

Inventories:
 
 
 
Raw materials and packaging
1,429

 
1,315

Work-in-process
220

 
150

Finished goods
1,633

 
1,258

 
3,282

 
2,723

Prepaid expenses and other current assets
1,031

 
908

Total Current Assets
27,150

 
26,450

Property, plant and equipment
37,373

 
36,818

Accumulated depreciation
(20,724
)
 
(20,227
)
 
16,649

 
16,591

Amortizable Intangible Assets, net
1,259

 
1,237

Goodwill
14,584

 
14,430

Other nonamortizable intangible assets
12,338

 
12,196

Nonamortizable Intangible Assets
26,922

 
26,626

Investments in Noncontrolled Affiliates
2,003

 
1,950

Other Assets
639

 
636

Total Assets
$
74,622

 
$
73,490

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Short-term debt obligations
$
8,577

 
$
6,892

Accounts payable and other current liabilities
13,067

 
14,243

Total Current Liabilities
21,644

 
21,135

Long-Term Debt Obligations
30,081

 
30,053

Other Liabilities
6,693

 
6,669

Deferred Income Taxes
4,521

 
4,434

Total Liabilities
62,939

 
62,291

 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
Preferred Stock, no par value
41

 
41

Repurchased Preferred Stock
(194
)
 
(192
)
PepsiCo Common Shareholders’ Equity
 
 
 
Common stock, par value 12/3¢ per share (authorized 3,600 shares; issued, net of repurchased common stock at par value: 1,430 and 1,428 shares, respectively)
24

 
24

Capital in excess of par value
3,857

 
4,091

Retained earnings
52,756

 
52,518

Accumulated other comprehensive loss
(13,416
)
 
(13,919
)
Repurchased common stock, in excess of par value (436 and 438 shares, respectively)
(31,499
)
 
(31,468
)
Total PepsiCo Common Shareholders’ Equity
11,722

 
11,246

Noncontrolling interests
114

 
104

Total Equity
11,683

 
11,199

Total Liabilities and Equity
$
74,622

 
$
73,490


See accompanying notes to the condensed consolidated financial statements.

6


Condensed Consolidated Statement of Equity
PepsiCo, Inc. and Subsidiaries
(in millions, unaudited)
 
12 Weeks Ended
 
3/25/2017
 
3/19/2016
 
Shares
 
Amount
 
Shares
 
Amount
Preferred Stock
0.8

 
$
41

 
0.8

 
$
41

Repurchased Preferred Stock
 
 
 
 
 
 
 
Balance, beginning of year
(0.7
)
 
(192
)
 
(0.7
)
 
(186
)
Redemptions

 
(2
)
 

 
(1
)
Balance, end of period
(0.7
)
 
(194
)
 
(0.7
)
 
(187
)
Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
1,428

 
24

 
1,448

 
24

Change in repurchased common stock
2

 

 
(2
)
 

Balance, end of period
1,430

 
24

 
1,446

 
24

Capital in Excess of Par Value
 
 
 
 
 
 
 
Balance, beginning of year
 
 
4,091

 
 
 
4,076

Share-based compensation expense
 
 
73

 
 
 
70

Stock option exercises, RSUs, PSUs and PEPunits converted (a)
 
 
(191
)
 
 
 
(139
)
Withholding tax on RSUs, PSUs and PEPunits converted
 
 
(116
)
 
 
 
(99
)
Other
 
 

 
 
 
(2
)
Balance, end of period
 
 
3,857

 
 
 
3,906

Retained Earnings
 
 
 
 
 
 
 
Balance, beginning of year
 
 
52,518

 
 
 
50,472

Net income attributable to PepsiCo
 
 
1,318

 
 
 
931

Cash dividends declared – common
 
 
(1,080
)
 
 
 
(1,020
)
Balance, end of period
 
 
52,756

 
 
 
50,383

Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
Balance, beginning of year
 
 
(13,919
)
 
 
 
(13,319
)
Other comprehensive income/(loss) attributable to PepsiCo
 
 
503

 
 
 
(250
)
Balance, end of period
 
 
(13,416
)
 
 
 
(13,569
)
Repurchased Common Stock
 
 
 
 
 
 
 
Balance, beginning of year
(438
)
 
(31,468
)
 
(418
)
 
(29,185
)
Share repurchases
(4
)
 
(477
)
 
(7
)
 
(664
)
Stock option exercises, RSUs, PSUs and PEPunits converted
6

 
446

 
5

 
360

Other

 

 

 
2

Balance, end of period
(436
)
 
(31,499
)
 
(420
)
 
(29,487
)
Total PepsiCo Common Shareholders’ Equity
 
 
11,722

 
 
 
11,257

Noncontrolling Interests
 
 
 
 
 
 
 
Balance, beginning of year
 
 
104

 
 
 
107

Net income attributable to noncontrolling interests
 
 
11

 
 
 
14

Currency translation adjustment
 
 
(1
)
 
 
 

Other, net
 
 

 
 
 
(1
)
Balance, end of period
 
 
114

 
 
 
120

Total Equity
 
 
$
11,683

 
 
 
$
11,231


(a)
Includes total tax benefits of $53 million in 2016.
See accompanying notes to the condensed consolidated financial statements.

7


Notes to the Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation and Our Divisions
Basis of Presentation
When used in this report, the terms “we,” “us,” “our,” “PepsiCo” and the “Company” mean PepsiCo, Inc. and its consolidated subsidiaries, collectively.
Our Condensed Consolidated Balance Sheet as of March 25, 2017 and Condensed Consolidated Statements of Income, Comprehensive Income, Cash Flows and Equity for the 12 weeks ended March 25, 2017 and March 19, 2016 have not been audited. These statements have been prepared on a basis that is substantially consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. This report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. In our opinion, these financial statements include all normal and recurring adjustments necessary for a fair presentation. The results for the 12 weeks ended March 25, 2017 are not necessarily indicative of the results expected for the full year.
While our financial results in the United States and Canada (North America) are reported on a 12-week basis, most of our international operations report on a monthly calendar basis for which the months of January and February are reflected in our first quarter results.
Our significant interim accounting policies include the recognition of a pro rata share of certain estimated annual sales incentives and certain advertising and marketing costs in proportion to revenue or volume, as applicable, and the recognition of income taxes using an estimated annual effective tax rate. Raw materials, direct labor and plant overhead, as well as purchasing and receiving costs, costs directly related to production planning, inspection costs and raw materials handling facilities, are included in cost of sales. The costs of moving, storing and delivering finished product are included in selling, general and administrative expenses.
The following information is unaudited. Unless otherwise noted, tabular dollars are in millions, except per share amounts. All per share amounts reflect common per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Reclassifications were made to the prior year’s financial statements to reflect the adoption of the recently issued accounting pronouncements disclosed in Note 2.
Our Divisions
We are organized into six reportable segments (also referred to as divisions), as follows:
1)
Frito-Lay North America (FLNA), which includes our branded food and snack businesses in the United States and Canada;
2)
Quaker Foods North America (QFNA), which includes our cereal, rice, pasta and other branded food businesses in the United States and Canada;
3)
North America Beverages (NAB), which includes our beverage businesses in the United States and Canada;
4)
Latin America, which includes all of our beverage, food and snack businesses in Latin America;
5)
Europe Sub-Saharan Africa (ESSA), which includes all of our beverage, food and snack businesses in Europe and Sub-Saharan Africa; and
6)
Asia, Middle East and North Africa (AMENA), which includes all of our beverage, food and snack businesses in Asia, Middle East and North Africa.

8


Net revenue and operating profit/(loss) of each division are as follows:
 
12 Weeks Ended
 
Net Revenue
 
Operating Profit/(Loss)
 
3/25/2017


3/19/2016

 
3/25/2017

 
3/19/2016

FLNA
$
3,499

 
$
3,418

 
$
1,060

 
$
1,018

QFNA
598

 
617

 
164

 
166

NAB
4,460

 
4,361

 
505

 
485

Latin America
1,077

 
1,042

 
132

 
175

ESSA
1,445

 
1,359

 
102

 
67

AMENA (a)
970

 
1,065

 
171

 
(148
)
Total division
12,049

 
11,862

 
2,134

 
1,763

Corporate Unallocated

 

 
(201
)
 
(144
)
 
$
12,049

 
$
11,862

 
$
1,933

 
$
1,619

(a)
Operating loss for AMENA for the 12 weeks ended March 19, 2016 includes an impairment charge of $373 million to reduce the value of our 5% indirect equity interest in Tingyi-Asahi Beverages Holding Co. Ltd. (TAB) to its estimated fair value.
Total assets of each division are as follows:
 
Total Assets
 
3/25/2017


12/31/2016

FLNA
$
5,684

 
$
5,731

QFNA
834

 
811

NAB
29,016

 
28,172

Latin America
4,732

 
4,568

ESSA
12,553

 
12,302

AMENA
5,473

 
5,261

Total division
58,292

 
56,845

Corporate (a)
16,330

 
16,645


$
74,622

 
$
73,490

(a)
Corporate assets consist principally of certain cash and cash equivalents, short-term investments, derivative instruments, property, plant and equipment and tax assets.
Note 2 - Recently Issued Accounting Pronouncements
Adopted
In 2016, the Financial Accounting Standards Board (FASB) issued guidance that changes the accounting for certain aspects of share-based payments to employees. We adopted the provisions of this guidance during our first quarter of 2017, resulting in the following impacts to our financial statements:
Income tax effects of vested or settled awards are recognized in the provision for income taxes on our income statement on a prospective basis. Previously, these tax effects were recorded on our equity statement in capital in excess of par value. Our excess tax benefits were $60 million for the 12 weeks ended March 25, 2017, resulting in a $0.04 increase to diluted net income attributable to PepsiCo per common share. For the 12 weeks ended March 19, 2016, our excess tax benefits recognized were $53 million. If we had applied this standard in 2016, the impact would have been a $0.04 increase to diluted net income attributable to PepsiCo per common share for the 12 weeks ended March 19, 2016. The ongoing impact on our financial statements is dependent on the timing of award vesting or exercises, our tax rate and the intrinsic value when awards vest or are exercised.

9


Excess tax benefits are retrospectively presented within operating activities and withholding tax payments upon vesting of restricted stock units (RSUs), performance stock units (PSUs) and PepsiCo equity performance units (PEPunits) are retrospectively presented within financing activities in the cash flow statement. The adoption resulted in an increase of $204 million and $174 million in our operating cash flow with a corresponding decrease in our financing cash flow for the 12 weeks ended March 25, 2017 and March 19, 2016, respectively.
The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes and not classify the award as a liability that requires valuation on a mark-to-market basis. Our accounting treatment for outstanding awards was not impacted by our adoption of this provision. In addition, the guidance allows for a policy election to account for forfeitures as they occur. We will continue to apply our policy of estimating forfeitures as they occur.
In 2016, the FASB issued guidance that eliminates the requirement that an investor retrospectively apply equity method accounting for an investment originally accounted for by another method. The guidance requires that an equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investor’s ability to exercise significant influence over the investment is achieved. We adopted the provisions of this guidance prospectively during our first quarter of 2017; the adoption did not impact our financial statements.
In 2015, the FASB issued guidance that requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet. We adopted the provisions of this guidance retrospectively during our first quarter of 2017, resulting in the reclassification of $639 million of deferred taxes from current to non-current on our balance sheet as of December 31, 2016.
Not Yet Adopted
In 2017, the FASB issued guidance that requires companies to retrospectively present the service cost component of net periodic benefit cost for pension and retiree medical plans along with other compensation costs in operating profit and present the other components of net periodic benefit cost below operating profit in the income statement. The guidance also allows only the service cost component of net periodic benefit cost to be eligible for capitalization within inventory or fixed assets on a prospective basis. The guidance is effective beginning in 2018 and we will adopt in the first quarter of 2018. We are currently evaluating the impact of this guidance on our financial statements. See Note 7 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Note 7 for further information on our service cost and other components of net periodic benefit cost for pension and retiree medical plans.
In 2016, the FASB issued guidance to clarify how restricted cash should be presented in the cash flow statement. The guidance is effective beginning in 2018 with early adoption permitted. The guidance is not expected to have a material impact on our financial statements. We are currently evaluating the timing of adoption of this guidance.
In 2016, the FASB issued guidance that changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking expected loss model that will replace today’s incurred loss model and generally will result in earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The guidance is effective beginning in 2020 with early adoption permitted in 2019. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

10


In 2016, the FASB issued guidance that requires lessees to recognize most leases on their balance sheets, but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective beginning in 2019 with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption. This adoption will result in an increase in the assets and liabilities on our balance sheet. We commenced our assessment of the impact of the guidance on our current lease portfolio from both a lessor and lessee perspective. See Note 13 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for our minimum lease payments under non-cancelable operating leases.
In 2016, the FASB issued guidance that requires companies to measure investments in certain equity securities at fair value and recognize any changes in fair value in net income. The guidance is effective beginning in 2018. Since early adoption is not permitted, we will adopt the guidance in the first quarter of 2018. We are currently evaluating the impact of this guidance on our financial statements, including the impact on certain of our investments in noncontrolled affiliates and our available-for-sale securities. We are evaluating opportunities to reduce the risk and volatility of these investments in the future. See Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Note 10 for further information on our available-for-sale securities.
In 2014, the FASB issued guidance on revenue recognition, with final amendments issued in 2016. The guidance provides for a five-step model to determine the revenue recognized for the transfer of goods or services to customers that reflects the expected entitled consideration in exchange for those goods or services. It also provides clarification for principal versus agent considerations and identifying performance obligations. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. Financial statement disclosures required under the guidance will enable users to understand the nature, amount, timing, judgments and uncertainty of revenue and cash flows relating to customer contracts. The two permitted transition methods under the guidance are the full retrospective approach or a cumulative effect adjustment to the opening retained earnings in the year of adoption (cumulative effect approach). The guidance is effective beginning in 2018, with early adoption permitted.
We are utilizing a comprehensive approach to assess the impact of the guidance on our contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the new requirements to our revenue contracts, including evaluation of our performance obligations, principal versus agent considerations and variable consideration. We continue to make significant progress on our contract reviews and are also in the process of evaluating the impact, if any, on changes to our business processes, systems and controls to support recognition and disclosure under the new guidance. Based on the foregoing, we do not currently expect this guidance to have a material impact on our financial statements. We are continuing with our implementation plan and currently expect to adopt the new guidance beginning in 2018 using the cumulative effect approach.
Note 3 - Restructuring and Impairment Charges
We publicly announced a multi-year productivity plan on February 13, 2014 (2014 Productivity Plan) that includes the next generation of productivity initiatives that we believe will strengthen our food, snack and beverage businesses by: accelerating our investment in manufacturing automation; further optimizing our global manufacturing footprint, including closing certain manufacturing facilities; re-engineering our go-to-market systems in developed markets; expanding shared services; and implementing simplified organization structures to drive efficiency.

11


In the 12 weeks ended March 25, 2017, we incurred pre- and after-tax restructuring charges of $27 million ($0.02 per share) in conjunction with our 2014 Productivity Plan. Additionally, we incurred $30 million ($25 million after-tax or $0.02 per share) in the 12 weeks ended March 19, 2016. All of these net charges were recorded in selling, general and administrative expenses and primarily relate to severance and other employee-related costs, asset impairments (all non-cash) and other costs associated with the implementation of our initiatives, including contract termination costs. Substantially all of the restructuring accrual at March 25, 2017 is expected to be paid by the end of 2017.
A summary of our 2014 Productivity Plan charges by segment is as follows:
 
12 Weeks Ended
 
3/25/2017
 
3/19/2016
 
Severance and Other
Employee Costs
 
Asset
Impairments
 
Other 
Costs
 
Total
 
Severance and Other
Employee Costs
 
Asset Impairments
 
Other 
Costs
 
Total
FLNA (a)
$
1

 
$

 
$

 
$
1

 
$
(4
)
 
$

 
$

 
$
(4
)
QFNA

 

 

 

 

 

 

 

NAB

 

 
2

 
2

 
7

 

 

 
7

Latin America
12

 
11

 
1

 
24

 

 

 

 

ESSA
4

 

 

 
4

 
1

 
9

 
9

 
19

AMENA (b)

 

 
(6
)
 
(6
)
 
3

 
2

 

 
5

Corporate
1

 

 
1

 
2

 
1

 

 
2

 
3

 
$
18

 
$
11

 
$
(2
)
 
$
27

 
$
8

 
$
11

 
$
11

 
$
30

(a)
Income amount represents adjustments for changes in estimates of previously recorded amounts.
(b)
Income amount primarily reflects a gain on the sale of property, plant and equipment.
Since the inception of the 2014 Productivity Plan, we incurred restructuring charges of $766 million:
 
2014 Productivity Plan Costs to Date
 
Severance and Other Employee Costs
 
Asset
Impairments
 
Other Costs
 
Total
FLNA
$
65

 
$
9

 
$
23

 
$
97

QFNA
15

 

 
6

 
21

NAB
97

 
68

 
84

 
249

Latin America
64

 
24

 
25

 
113

ESSA
85

 
37

 
56

 
178

AMENA
21

 
6

 
14

 
41

Corporate
18

 

 
49

 
67

 
$
365

 
$
144

 
$
257

 
$
766


12


A summary of our 2014 Productivity Plan activity for the 12 weeks ended March 25, 2017 is as follows:
 
Severance and
Other Employee Costs
 
Asset Impairments
 
Other Costs
 
Total
Liability as of December 31, 2016
$
88

 
$

 
$
8

 
$
96

2017 restructuring charges
18

 
11

 
(2
)
 
27

Cash payments
(5
)
 

 
(2
)
 
(7
)
Non-cash charges and translation
(1
)
 
(11
)
 
6

 
(6
)
Liability as of March 25, 2017
$
100

 
$

 
$
10

 
$
110

There were no material charges related to other productivity and efficiency initiatives outside the scope of the 2014 Productivity Plan.
We regularly evaluate different productivity initiatives beyond the 2014 Productivity Plan discussed above.
See additional unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Note 4 - Intangible Assets
A summary of our amortizable intangible assets is as follows:
 
 
3/25/2017
 
12/31/2016
 
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Acquired franchise rights
 
$
830

 
$
(113
)
 
$
717

 
$
827

 
$
(108
)
 
$
719

Reacquired franchise rights
 
105

 
(102
)
 
3

 
106

 
(102
)
 
4

Brands
 
1,288

 
(990
)
 
298

 
1,277

 
(977
)
 
300

Other identifiable intangibles
 
541

 
(300
)
 
241

 
522

 
(308
)
 
214

 
 
$
2,764

 
$
(1,505
)
 
$
1,259

 
$
2,732

 
$
(1,495
)
 
$
1,237


13


The change in the book value of nonamortizable intangible assets is as follows:
 
Balance
12/31/2016
 
Translation
and Other
 
Balance
3/25/2017

 
 
FLNA

 

 

Goodwill
$
270

 
$
2

 
$
272

Brands
23

 

 
23


293

 
2

 
295

 
 
 
 
 
 
QFNA
 
 
 
 
 
Goodwill
175

 

 
175

 
 
 
 
 
 
NAB
 
 
 
 
 
Goodwill
9,843

 
5

 
9,848

Reacquired franchise rights
7,064

 
8

 
7,072

Acquired franchise rights
1,512

 
1

 
1,513

Brands
314

 

 
314


18,733

 
14

 
18,747

 
 
 
 
 
 
Latin America
 
 
 
 
 
Goodwill
553

 
16

 
569

Brands
150

 
6

 
156


703

 
22

 
725

 
 
 
 
 
 
ESSA
 
 
 
 
 
Goodwill
3,177

 
110

 
3,287

Reacquired franchise rights
488

 
14

 
502

Acquired franchise rights
184

 
1

 
185

Brands
2,358

 
105

 
2,463


6,207

 
230

 
6,437

 
 
 
 
 
 
AMENA
 
 
 
 
 
Goodwill
412

 
21

 
433

Brands
103

 
7

 
110


515

 
28

 
543

 
 
 
 
 
 
Total goodwill
14,430

 
154

 
14,584

Total reacquired franchise rights
7,552

 
22

 
7,574

Total acquired franchise rights
1,696

 
2

 
1,698

Total brands
2,948

 
118

 
3,066


$
26,626

 
$
296

 
$
26,922



14


Note 5 - Income Taxes
A rollforward of our reserves for all federal, state and foreign tax jurisdictions is as follows: 
 
3/25/2017

 
12/31/2016

Balance, beginning of year
$
1,885

 
$
1,547

Additions for tax positions related to the current year
57

 
349

Additions for tax positions from prior years
6

 
139

Reductions for tax positions from prior years
(2
)
 
(70
)
Settlement payments
(2
)
 
(26
)
Statutes of limitations expiration
(6
)
 
(27
)
Translation and other
13

 
(27
)
Balance, end of period
$
1,951

 
$
1,885

Note 6 - Share-Based Compensation
The following table summarizes our total share-based compensation expense:
 
 
12 Weeks Ended
 
 
3/25/2017

 
3/19/2016

Share-based compensation expense - equity awards
 
$
72

 
$
69

Share-based compensation expense - liability awards
 
4

 
2

Restructuring and impairment charges
 
1

 
1

Total
 
$
77

 
$
72

The following table summarizes share-based awards granted under the terms of the PepsiCo, Inc. Long-Term Incentive Plan:
 
12 Weeks Ended
 
3/25/2017
 
3/19/2016
 
Granted(a)
 
Weighted-Average Grant Price
 
Granted(a)
 
Weighted-Average Grant Price
Stock options
1.3

 
$
109.75

 
1.5

 
$
98.75

RSUs and PSUs
2.7

 
$
109.75

 
2.9

 
$
98.74

(a)
In millions. All grant activity is disclosed at target.
We granted long-term cash awards to certain executive officers and other senior executives with an aggregate target value of $19 million and $16 million during the 12 weeks ended March 25, 2017 and March 19, 2016, respectively.
Our weighted-average Black-Scholes fair value assumptions are as follows: 
 
12 Weeks Ended
 
3/25/2017

 
3/19/2016

Expected life
5 years

 
6 years

Risk-free interest rate
2.0
%
 
1.5
%
Expected volatility
11
%
 
12
%
Expected dividend yield
2.7
%
 
2.7
%

15


Note 7 - Pension and Retiree Medical Benefits

Effective January 1, 2017, the U.S. qualified defined benefit pension plans were reorganized into the PepsiCo Employees Retirement Plan A, or active plan, and the PepsiCo Employees Retirement Plan I, or inactive plan. Actuarial gains and losses associated with the active plan are amortized over the average remaining service life of the active participants (approximately 11 years beginning in 2017), while the actuarial gains and losses associated with the inactive plan are amortized over the remaining life expectancy of the inactive participants (approximately 27 years beginning in 2017). The pre-tax reduction in net periodic benefit cost associated with this change was $10 million ($6 million after-tax with a nominal amount per share) in the first quarter of 2017 and will approximate $40 million in 2017, primarily impacting corporate unallocated.
The components of net periodic benefit cost for pension and retiree medical plans are as follows: 
 
12 Weeks Ended
 
Pension

Retiree Medical
 
3/25/2017


3/19/2016


3/25/2017


3/19/2016


3/25/2017


3/19/2016

 
U.S.

International

 
Service cost
$
93


$
91


$
16


$
15


$
6


$
7

Interest cost
108


111


15


18


9


9

Expected return on plan assets
(196
)

(192
)

(30
)

(31
)

(5
)

(5
)
Amortization of prior service credits








(6
)

(9
)
Amortization of net losses/(gains)
28


38


9


8


(3
)



33


48


10


10


1


2

Special termination benefits
1

 

 

 

 

 

Total expense
$
34


$
48


$
10


$
10


$
1


$
2

There were no discretionary contributions made in the first quarter of 2017. During the first quarter of 2016, we made discretionary contributions of $7 million to our international pension plans.
We regularly evaluate different opportunities to reduce risk and volatility associated with our pension and retiree medical plans.
Note 8 - Debt Obligations
In the 12 weeks ended March 25, 2017, $0.8 billion of senior notes matured and were paid.
As of March 25, 2017, we had $4.5 billion of commercial paper outstanding.

16


Note 9 - Accumulated Other Comprehensive Loss
The reclassifications from accumulated other comprehensive loss to the income statement are summarized as follows:
 
 
12 Weeks Ended
 
 
 
 
3/25/2017

 
3/19/2016

 
Affected Line Item in the Income Statement
Cash flow hedges:
 
 
 
 
 
 
    Foreign exchange contracts
 
$
(5
)
 
$
(21
)
 
Cost of sales
    Interest rate derivatives
 
(30
)
 
(3
)
 
Interest expense
    Commodity contracts
 
2

 
1

 
Cost of sales
    Commodity contracts
 

 
2

 
Selling, general and administrative expenses
    Net gains before tax
 
(33
)
 
(21
)
 
 
    Tax amounts
 
11

 
5

 
 
    Net gains after tax
 
$
(22
)
 
$
(16
)
 
 
 
 
 
 
 
 
 
Pension and retiree medical items:
 
 
 
 
 
 
    Amortization of prior service credits (a)
 
$
(6
)
 
$
(9
)
 
 
    Amortization of net losses (a)
 
34

 
46

 
 
    Net losses before tax
 
28

 
37

 
 
    Tax amounts
 
(9
)
 
(12
)
 
 
    Net losses after tax
 
$
19

 
$
25

 
 
 
 
 
 
 
 
 
Total net (gains)/losses reclassified, net of tax
 
$
(3
)
 
$
9

 
 
(a)
These items are included in the components of net periodic benefit cost for pension and retiree medical plans (see Note 7 for additional details).
Note 10 - Financial Instruments
We are exposed to market risks arising from adverse changes in:
commodity prices, affecting the cost of our raw materials and energy;
foreign exchange rates and currency restrictions; and
interest rates.
There have been no material changes during the 12 weeks ended March 25, 2017 with respect to our risk management policies or strategies and valuation techniques used in measuring the fair value of the financial assets or liabilities disclosed in Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
The notional amounts of our financial instruments used to hedge the above risks as of March 25, 2017 and December 31, 2016 are as follows:
 
Notional Amounts(a)
 
3/25/2017

 
12/31/2016

Foreign exchange
$
1.6

 
$
1.6

Interest rate
$
11.2

 
$
11.2

Commodity
$
0.9

 
$
0.8

Net investment
$
0.8

 
$
0.8

(a)
In billions.

17


Ineffectiveness for all derivatives and non-derivatives that qualify for hedge accounting treatment was not material for all periods presented.
As of March 25, 2017, approximately 42% of total debt, after the impact of the related interest rate derivative instruments, was subject to variable rates, compared to approximately 38% as of December 31, 2016.
Fair Value Measurements
The fair values of our financial assets and liabilities as of March 25, 2017 and December 31, 2016 are categorized as follows:
 
3/25/2017
 
12/31/2016
 
Assets(a)
 
Liabilities(a)
 
Assets(a)
 
Liabilities(a)
Available-for-sale securities:


 


 


 


Equity securities (b)
$
93

 
$

 
$
82

 
$

Debt securities (c)
11,964

 

 
11,369

 

 
$
12,057

 
$

 
$
11,451

 
$

Short-term investments (d)
$
202

 
$

 
$
193

 
$

Prepaid forward contracts (e)
$
27

 
$

 
$
25

 
$

Deferred compensation (f)
$

 
$
483

 
$

 
$
472

Derivatives designated as fair value hedging instruments:
 
 
 
 
 
 
 
Interest rate (g)
$
54

 
$
81

 
$
66

 
$
71

Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
Foreign exchange (h)
$
30

 
$
16

 
$
51

 
$
8

Interest rate (h)

 
389

 

 
408

Commodity (i)
1

 
1

 
2

 
1

 
$
31

 
$
406

 
$
53

 
$
417

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange (h)
$

 
$
9

 
$
2

 
$
15

Commodity (i)
54

 
32

 
61

 
26

 
$
54

 
$
41

 
$
63

 
$
41

Total derivatives at fair value (j)
$
139

 
$
528

 
$
182

 
$
529

Total
$
12,425

 
$
1,011

 
$
11,851

 
$
1,001

(a)
Unless otherwise noted, financial assets are classified on our balance sheet within prepaid expenses and other current assets and other assets. Financial liabilities are classified on our balance sheet within accounts payable and other current liabilities and other liabilities. Unless specifically indicated, all financial assets and liabilities are categorized as Level 2 assets or liabilities.
(b)
Based on the price of common stock. Categorized as a Level 1 asset. These equity securities are classified as investments in noncontrolled affiliates. The pre-tax unrealized gains on our investments in marketable equity securities were $83 million and $72 million as of March 25, 2017 and December 31, 2016, respectively.
(c)
Based on quoted broker prices or other significant inputs derived from or corroborated by observable market data. As of March 25, 2017, $5.7 billion and $6.3 billion of debt securities were classified as cash equivalents and short-term investments, respectively. As of December 31, 2016, $4.6 billion and $6.8 billion of debt securities were classified as cash equivalents and short-term investments, respectively. Unrealized gains and losses on our investments in debt securities as of March 25, 2017 and December 31, 2016 were not material. All of our available-for-sale debt securities have maturities of one year or less.
(d)
Based on the price of index funds. Categorized as a Level 1 asset. These investments are classified as short-term investments and are used to manage a portion of market risk arising from our deferred compensation liability.
(e)
Based primarily on the price of our common stock.
(f)
Based on the fair value of investments corresponding to employees’ investment elections.
(g)
Based on LIBOR forward rates.
(h)
Based on recently reported market transactions of spot and forward rates.
(i)
Based on recently reported market transactions, primarily swap arrangements.
(j)
Unless otherwise noted, derivative assets and liabilities are presented on a gross basis on our balance sheet. Amounts subject to enforceable master netting arrangements or similar agreements which are not offset on the balance sheet as of March 25, 2017 and December 31, 2016 were not material. Collateral received against any of our asset positions was not material.

18


The carrying amounts of our cash equivalents and short-term investments approximate fair value due to their short-term maturity. The fair value of our debt obligations as of March 25, 2017 and December 31, 2016 was $40 billion and $38 billion, respectively, based upon prices of similar instruments in the marketplace, which are considered Level 2 inputs.
Losses/(gains) on our hedging instruments are categorized as follows:
 
12 Weeks Ended
 
Fair Value/Non-
designated Hedges
 
Cash Flow and Net Investment Hedges
 
Losses/(Gains)
Recognized in
Income Statement(a)
 
Losses/(Gains)
Recognized in
Accumulated Other
Comprehensive Loss
 
Losses/(Gains)
Reclassified from
Accumulated Other
Comprehensive Loss
into Income
Statement(b)
 
3/25/2017

 
3/19/2016

 
3/25/2017

 
3/19/2016

 
3/25/2017

 
3/19/2016

Foreign exchange
$
(5
)
 
$
33

 
$
20

 
$
16

 
$
(5
)
 
$
(21
)
Interest rate
22

 
(69
)
 
(19
)
 
(16
)
 
(30
)
 
(3
)
Commodity
3

 
4

 
2

 

 
2

 
3

Net investment

 

 
18

 

 

 

Total
$
20

 
$
(32
)
 
$
21

 
$

 
$
(33
)
 
$
(21
)
(a)
Foreign exchange derivative losses/gains are primarily included in selling, general and administrative expenses. Interest rate derivative losses/gains are primarily from fair value hedges and are included in interest expense. These losses/gains are substantially offset by decreases/increases in the value of the underlying debt, which are also included in interest expense. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.
(b)
Foreign exchange derivative losses/gains are included in cost of sales. Interest rate derivative losses/gains are included in interest expense. Commodity derivative losses/gains are included in either cost of sales or selling, general and administrative expenses, depending on the underlying commodity.
Based on current market conditions, we expect to reclassify net losses of $4 million related to our cash flow hedges from accumulated other comprehensive loss into net income during the next 12 months.
Tingyi-Asahi Beverages Holding Co. Ltd.
During the first quarter of 2016, we concluded that the decline in estimated fair value of our 5% indirect equity interest in TAB was other than temporary based on significant negative economic trends in China and changes in assumptions associated with TAB’s future financial performance arising from the disclosure by TAB’s parent company, Tingyi, regarding the operating results of its beverage business. As a result, we recorded a pre- and after-tax impairment charge of $373 million ($0.26 per share) in the first quarter of 2016 in the AMENA segment. This charge was recorded in selling, general and administrative expenses on our income statement and reduced the value of our 5% indirect equity interest in TAB to its estimated fair value. The estimated fair value was derived using both an income and market approach, and is considered a non-recurring Level 3 measurement within the fair value hierarchy. The carrying value of the investment in TAB was $166 million as of March 25, 2017. We continue to monitor the impact of economic and other developments on the remaining value of our investment in TAB.
See further unaudited information in “Items Affecting Comparability” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.


19


Note 11 - Net Income Attributable to PepsiCo per Common Share
The computations of basic and diluted net income attributable to PepsiCo per common share are as follows:
 
12 Weeks Ended
 
3/25/2017
 
3/19/2016
 
Income
 
Shares(a)
 
Income
 
Shares(a)
Net income attributable to PepsiCo
$
1,318

 
 
 
$
931

 
 
Preferred shares:
 
 
 
 
 
 
 
Redemption premium
(2
)
 
 
 
(1
)
 
 
Net income available for PepsiCo common shareholders
$
1,316

 
1,428

 
$
930

 
1,446

Basic net income attributable to PepsiCo per common share
$
0.92

 
 
 
$
0.64

 
 
Net income available for PepsiCo common shareholders
$
1,316

 
1,428

 
$
930

 
1,446

Dilutive securities:
 
 
 
 
 
 
 
Stock options, RSUs, PSUs, PEPunits and Other

 
11

 

 
12

Employee stock ownership plan (ESOP) convertible preferred stock
2

 
1

 
1

 
1

Diluted
$
1,318

 
1,440

 
$
931

 
1,459

Diluted net income attributable to PepsiCo per common share
$
0.91

 
 
 
$
0.64

 
 
(a)
Weighted-average common shares outstanding (in millions).

Out-of-the-money options excluded from the calculation of diluted earnings per common share are as follows: 
 
12 Weeks Ended
 
3/25/2017
 
3/19/2016
Out-of-the-money options (a)
1.4

 
2.9

Average exercise price per option
$
109.69

 
$
98.99

(a)
In millions.

20


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL REVIEW
Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our condensed consolidated financial statements and the accompanying notes. Also refer to Note 1 of our condensed consolidated financial statements. Unless otherwise noted, tabular dollars are presented in millions, except per share amounts. All per share amounts reflect common stock per share amounts, assume dilution unless otherwise noted, and are based on unrounded amounts. Percentage changes are based on unrounded amounts.
Our Critical Accounting Policies
The critical accounting policies below should be read in conjunction with those outlined in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Sales Incentives and Advertising and Marketing Costs
We offer sales incentives and discounts through various programs to customers and consumers. These incentives and discounts are primarily accounted for as a reduction of revenue. A number of our sales incentives, such as bottler funding to independent bottlers and customer volume rebates, are based on annual targets, and accruals are established during the year for the expected payout. These accruals are based on contract terms and our historical experience with similar programs and require management’s judgment with respect to estimating customer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. Certain advertising and marketing costs are also based on annual targets.
For interim reporting, our policy is to allocate our forecasted full-year sales incentives for most of our programs to each of our interim reporting periods in the same year that benefits from the programs. The allocation methodology is based on our forecasted sales incentives for the full year and the proportion of each interim period’s actual gross revenue or volume, as applicable, to our forecasted annual gross revenue or volume, as applicable. Based on our review of the forecasts at each interim period, any changes in estimates and the related allocation of sales incentives are recognized beginning in the interim period that they are identified. In addition, we apply a similar allocation methodology for interim reporting purposes for certain advertising and other marketing activities.
Income Taxes
In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate which is based on our expected annual income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Subsequent recognition, derecognition and measurement of a tax position taken in a previous period are separately recognized in the quarter in which they occur.
Our Business Risks
This Quarterly Report on Form 10-Q (Form 10-Q) contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (Reform Act). Statements that constitute forward-looking statements within the meaning of the Reform Act are generally identified through the inclusion of words such as “aim,” “anticipate,” “believe,” “drive,” “estimate,” “expect,” “expressed confidence,” “forecast,” “future,” “goal,” “guidance,” “intend,” “may,” “objective,” “outlook,” “plan,” “position,” “potential,” “project,” “seek,” “should,” “strategy,” “target,” “will” or similar statements or variations of such words and other similar expressions. All statements addressing our future operating performance, and statements addressing

21


events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Reform Act. These forward-looking statements are based on currently available information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in any such forward-looking statement. Such risks and uncertainties include, but are not limited to: changes in demand for PepsiCo’s products, as a result of changes in consumer preferences or otherwise; changes in, or failure to comply with, applicable laws and regulations; imposition or proposed imposition of new or increased taxes aimed at PepsiCo’s products; imposition of labeling or warning requirements on PepsiCo’s products; changes in laws related to packaging and disposal of PepsiCo’s products; PepsiCo’s ability to compete effectively; political conditions, civil unrest or other developments and risks in the markets where PepsiCo’s products are made, manufactured, distributed or sold; PepsiCo’s ability to grow its business in developing and emerging markets; unfavorable economic conditions in the countries in which PepsiCo operates; the ability to protect information systems against, or effectively respond to, a cybersecurity incident or other disruption; increased costs, disruption of supply or shortages of raw materials and other supplies; business disruptions; product contamination or tampering or issues or concerns with respect to product quality, safety and integrity; damage to PepsiCo’s reputation or brand image; failure to successfully complete or integrate acquisitions and joint ventures into PepsiCo’s existing operations or to complete or manage divestitures or refranchisings; changes in estimates and underlying assumptions regarding future performance that could result in an impairment charge; increase in income tax rates, changes in income tax laws or disagreements with tax authorities; failure to realize anticipated benefits from PepsiCo’s productivity initiatives or global operating model; PepsiCo’s ability to recruit, hire or retain key employees or a highly skilled and diverse workforce; loss of any key customer or changes to the retail landscape; any downgrade or potential downgrade of PepsiCo’s credit ratings; PepsiCo’s ability to implement shared services or utilize information technology systems and networks effectively; fluctuations or other changes in exchange rates; climate change or water scarcity, or legal, regulatory or market measures to address climate change or water scarcity; failure to successfully negotiate collective bargaining agreements, or strikes or work stoppages; infringement of intellectual property rights; potential liabilities and costs from litigation or legal proceedings; and other factors that may adversely affect the price of PepsiCo’s publicly traded securities and financial performance including those described in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Business Risks,” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Business Risks” of this Form 10-Q. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
In the 12 weeks ended March 25, 2017, our operations outside of North America reflect the months of January and February. In the 12 weeks ended March 25, 2017, our operations outside of the United States generated 34% of our net revenue, with Canada, Mexico, Russia, the United Kingdom and Brazil comprising approximately 16% of our net revenue. As a result, we are exposed to foreign exchange risks in the international markets in which our products are made, manufactured, distributed or sold. In the 12 weeks ended March 25, 2017, net unfavorable foreign exchange reduced net revenue growth by 1 percentage point due to declines in the Egyptian pound, Mexican peso and the Pound sterling, partially offset by appreciation in the Russian ruble and Brazilian real. Currency declines against the U.S. dollar which are not offset could adversely impact our future financial results.
In addition, volatile economic, political and social conditions and civil unrest in certain markets in which our products are made, manufactured, distributed or sold, including in Brazil, China, India, Mexico, the Middle East, Russia and Turkey, and currency fluctuations in certain of these international markets continue to result in challenging operating environments. We also continue to monitor the economic and political

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developments related to the United Kingdom’s pending withdrawal from the European Union, and the potential impact, if any, for the ESSA segment and our other businesses.
We continue to monitor the economic, operating and political environment in Russia closely. In the 12 weeks ended March 25, 2017 and March 19, 2016, total net revenue generated by our operations in Russia represented 4% and 3%, respectively, of our net revenue. As of March 25, 2017, we have $4.6 billion of long-lived assets in Russia.
Due to exchange restrictions and other conditions, effective at the end of the third quarter of 2015 we deconsolidated our Venezuelan subsidiaries and began accounting for our investments in our Venezuelan subsidiaries and joint venture using the cost method of accounting. We reduced the value of the cost method investments to their estimated fair values, resulting in a full impairment. The factors that led to our conclusions at the end of the third quarter of 2015 continued to exist through the end of the first quarter of 2017.
We do not have any guarantees related to our Venezuelan entities, and our ongoing contractual commitments to our Venezuelan businesses are not material. We will recognize income from dividends and sales of inventory to our Venezuelan entities, which have not been and are not expected to be material, to the extent cash in U.S. dollars is received. We have not received any cash in U.S. dollars from our Venezuelan entities since our deconsolidation at the end of the third quarter of 2015. We continue to monitor the conditions in Venezuela and their impact on our accounting and disclosures.

In addition, certain jurisdictions in which our products are made, manufactured, distributed or sold have either imposed, or are considering imposing, new or increased taxes on the manufacture, sale or distribution of our products, ingredients or substances contained in, or attributes of, our products or commodities used in the production of our products. These taxes vary in scope and form: some apply to all beverages, including non-caloric beverages, while others apply only to beverages with a caloric sweetener (e.g., sugar). Similarly, some measures apply a single tax rate per liquid ounce while others apply a graduated tax rate depending upon the amount of added sugar in the beverage.

We sell a wide variety of beverages, foods and snacks in more than 200 countries and territories and the profile of the products we sell, and the amount of revenue attributable to such products, varies by jurisdiction. Because of this, we cannot predict the scope or form potential taxes or other potential limitations on our products may take, and therefore cannot predict the impact of such taxes or limitations on our financial results. In addition, taxes and limitations may impact us and our competitors differently. We continue to monitor existing and proposed taxes in the jurisdictions in which our products are made, manufactured, distributed and sold and to consider actions we may take to potentially mitigate the unfavorable impact, if any, of such taxes or limitations, including advocating for alternative measures with respect to the imposition, form and scope of any such taxes or limitations.
See Note 10 to our condensed consolidated financial statements for the fair values of our financial instruments as of March 25, 2017 and December 31, 2016 and Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for a discussion of these items. Cautionary statements included above and in “Item 1A. Risk Factors” and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Business Risks,” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, should be considered when evaluating our trends and future results.

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Results of Operations – Consolidated Review
Consolidated Results
Volume
Since our divisions each use different measures of physical unit volume (i.e., kilos, gallons, pounds and case sales), a common servings metric is necessary to reflect our consolidated physical unit volume. Our divisions’ physical volume measures are converted into servings based on U.S. Food and Drug Administration guidelines for single-serving sizes of our products. For the 12 weeks ended March 25, 2017, total servings increased 0.5%. For the 12 weeks ended March 19, 2016, total servings increased 2%.
We discuss volume for our beverage businesses on a bottler case sales (BCS) basis in which all beverage volume is converted to an 8-ounce-case metric. Most of our beverage volume is sold by our Company-owned and franchise-owned bottlers, and that portion is based on our bottlers’ sales to retailers and independent distributors. The remainder of our volume is based on our direct shipments to retailers and independent distributors. We report the majority of our international beverage volume on a monthly basis. Our first quarter includes beverage volume outside of North America for the months of January and February. Concentrate shipments and equivalents (CSE) represent our physical beverage volume shipments to independent bottlers, retailers and independent distributors, and is the measure upon which our revenue is based.
Total Net Revenue and Operating Profit/(Loss)
 
12 Weeks Ended
 
3/25/2017

 
3/19/2016

 
Change
Total net revenue
$
12,049

 
$
11,862

 
2
 %
Operating profit/(loss)
 
 
 
 
 
FLNA
$
1,060

 
$
1,018

 
4
 %
QFNA
164

 
166

 
(1
)%
NAB
505

 
485

 
4
 %
Latin America
132

 
175

 
(24
)%
ESSA
102

 
67

 
51
 %
AMENA
171

 
(148
)
 
n/m

Corporate Unallocated
(201
)
 
(144
)
 
40
 %
Total operating profit
$
1,933

 
$
1,619

 
19
 %
 
 
 
 
 
 
Total operating profit margin
16.0
%
 
13.7
%
 
2.3

n/m - Not meaningful due to the impact of a 2016 impairment charge to reduce the value of our 5% indirect equity interest in TAB to its estimated fair value.
See “Results of Operations – Division Review” for a tabular presentation and discussion of key drivers of net revenue.
Total operating profit increased 19% and operating margin increased 2.3 percentage points. Operating profit growth was primarily driven by items affecting comparability (see “Items Affecting Comparability”), which contributed 19 percentage points to operating profit growth and increased total operating profit margin by 2.7 percentage points, primarily reflecting a prior year impairment charge to reduce the value of our 5% indirect equity interest in TAB to its estimated fair value. Additionally, operating profit growth was driven by effective net pricing and planned cost reductions across a number of expense categories. These impacts were partially offset by operating cost increases and higher commodity costs. Commodity inflation reduced

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operating profit growth by 5 percentage points, primarily attributable to inflation in the AMENA, Latin America and ESSA segments, partially offset by deflation in the NAB and QFNA segments. Corporate unallocated expenses increased 40%, primarily due to mark-to-market net impact associated with commodity derivatives which is also included in the items affecting comparability mentioned above.
Other Consolidated Results 
 
12 Weeks Ended
 
 
3/25/2017

 
3/19/2016

 
Change
 
Interest expense, net
$
(212
)
 
$
(232
)
 
$
(20
)
 
Tax rate
22.7
%
 
31.9
%
 
 
 
Ne